The Downsides of Investing in Mutual Funds

When it comes to the world of investing, you can’t find an option that can fit all of your goals and circumstances.  Each and every investor has goals and risk profiles.  That’s why even if an investment suits your friend’s situation, it doesn’t necessarily follow that it will suit yours too.

In the same manner, there are various Kinds of Derivatives and types of mutual funds and each one of these caters to the variety requirements of investors.  First, you need to understand your financial goals, risk profile, and the time period that you will stay invested.

It’s always better to invest following your financial goals so you won’t end up choosing the wrong fund.

Mutual funds sport different risks

Keep in mind that there’s no such thing as a risk free investment.  Instead, every mutual fund scheme entails various risks.

If you have high risk appetite, equity oriented mutual fund schemes might be more suitable for you.  However, if you’re a conservative investor, it’s a better idea to choose debt-oriented funds or balanced funds since these are less volatile.

On the flip side, it doesn’t necessarily follow that debt mutual funds carry low risks.  For instance, consider the case of dynamic bond funds.  You cannot expect that your capital would be intact like fixed deposits.  This is because dynamic funds are a category that’s sensitive to interest rate movements or rate changes.  Because of this, they can be subject to short-term falls.

Mutual funds have different asset allocation models

If you really want to invest in Derivative Trading, mutual funds, you have to find a fund that has an optimal asset allocation.  There are many assets to choose from, such as debt, equity, gold, and real estate, among other things.

You need to choose a fund that falls in line with your investment strategy as it balances the risks and returns of your portfolio.

Mutual funds have different investment strategies

Remember that every mutual fund has a different investment strategy.  There are aggressive funds out there that take much risk as they invest in industries and infrastructure.  Meanwhile, some other funds invest only in the international market.

Therefore, it’s a must to understand the investment strategy of the fund where you plan to invest your savings.

Mutual funds do not provide regular income

If you really want to generate some extra regular income, you can’t invest in mutual funds.  The dividends that come from these funds are paid from profits.  Therefore, in case of an extended period of loss, you will find yourself without any income.  You capital might also be eaten away in the event of continuous losses.

So, if you’re sticking to regular income from your investments, you should just choose debt-oriented funds that have systematic withdrawal options to generate such cash flow.

Mutual funds have different time frames

If you’re the type that wants to see results in as short as one year, investing in mutual funds might not be suitable for you.  In general, equity funds require at least five to seven years to avoid capital losses and achieve inflation-adjusted returns.